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Can Steel Stocks Maintain Their Earnings Momentum in Q4?

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The steel industry had a dream run in 2021 as steel prices catapulted to all-time highs, allowing companies in this space to rack up strong profits in the first three quarters of the year despite a spike in steel input costs and headwinds from supply-chain and logistics upheavals. However, the industry has hit a speed bump after a bumper year as steel prices have cooled off, partly due to the improving supply-side situation.

Can steel stocks deliver another quarter of strong performance following three consecutive solid quarters? Let’s take a look.

NUE & STLD See Record Q4, X Warns of a Slowdown

Last month, some prominent U.S. steel producers came up with their guidance for the December quarter. Nucor Corporation (NUE - Free Report) was the first to divulge the outlook for the fourth quarter. The steel giant expects to log record quarterly earnings in the fourth quarter, driven by strong demand across most of its end-markets. It projects earnings in the band of $7.65-$7.75 per share. NUE expects that the fourth quarter will mark the highest quarterly earnings in its history, surpassing the third-quarter 2021’s record of $7.28. Nucor envisions earnings in the steel mills segment to remain strong in the fourth quarter, despite lower volumes due to year-end seasonality.

Nucor currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for NUE’s earnings for the fourth quarter is pegged at $7.83, suggesting year-over-year growth of 484.3%. The company is scheduled to come up with fourth-quarter results on Jan 27. You can see the complete list of today’s Zacks #1 Rank stocks here.

Steel Dynamics, Inc. (STLD - Free Report) also sees record fourth-quarter performance on the back of robust domestic steel demand, particularly in the automotive, construction and industrial sectors. It projects fourth-quarter earnings in the range of $5.46-$5.5 per share, which suggests a record quarterly performance. Adjusted earnings have been forecast in the band of $5.69-$5.73 per share. STLD expects sequentially higher profit in its steel operations in the fourth quarter, driven by strong underlying steel demand and metal spread expansion across the entire platform.

Steel Dynamics currently carries a Zacks Rank #2 (Buy). The consensus estimate for STLD’s earnings for the fourth quarter stands at $5.84, indicating year-over-year growth of 502.1%. It is slated to report fourth-quarter results on Jan 24.

Meanwhile, United States Steel Corporation (X - Free Report) expects adjusted EBITDA for the fourth quarter to be roughly $1.65 billion. While the outlook for the fourth quarter reflects impressive performance, it reflects a temporary slowdown in order entry activity, which the company believes is related to typical seasonal year-end buying activity. X sees strong performance in its Flat-rolled segment led by increased flow-through of higher steel selling prices, offset by cautious seasonal buying and higher raw material and energy costs.

United States Steel currently carries a Zacks Rank #2. The consensus estimate for X’s earnings for the fourth quarter is pegged at $4.73, reflecting year-over-year growth of 1,851.9%. The company will report fourth-quarter results on Jan 27.

Still-Elevated Prices and Strong Demand to Drive Profits

Steel companies’ fourth-quarter earnings are likely to reflect strong underlying demand and higher year-over-year steel prices. Demand for steel started to pick up from the third quarter of last year with the resumption of operations across major steel-consuming sectors, following the easing of lockdowns and restrictions globally.

Steel makers are likely to have witnessed continued healthy demand in the automotive market in the fourth quarter, despite the semiconductor crunch, which is affecting automotive production. Order activities in the non-residential construction and equipment are also expected to be strong in the quarter. Steel companies are also likely to have benefited from improved demand in the energy sector on rising oil and gas prices. The impact of strong demand in major markets will likely be reflected on their performance in the fourth quarter. However, shipment volumes are likely to have been affected by year-end seasonality.

Meanwhile, steel prices have come under pressure since the beginning of the fourth quarter of 2021, partly due to rising production levels.  Steel prices escalated to record highs last year on solid demand, higher raw material costs, tight supply and low steel supply-chain inventories globally. U.S. steel prices witnessed an unprecedented surge in 2021 on demand-supply imbalance. The benchmark hot-rolled coil (“HRC”) prices broke above the $1,900 per short ton level in August 2021 on supply tightness and robust demand.

However, HRC prices have lost steam since October after peaking in September 2021, pulled down by shorter lead times and rising supply. Steel production is on the rise as more and more capacity is coming online. Higher steel imports have also been exerting downward pressure on U.S. steel prices of late.

Nevertheless, HRC prices remain elevated (currently hovering around $1,500 per short ton) notwithstanding the recent steep correction from its peak levels. They are well above the year-ago levels and more than three times higher than the August 2020 low of $440 per short ton.

The effects of the higher year-over-year prices are expected to get reflected on steel companies’ bottom lines for the fourth quarter. Higher steel prices are likely to have provided a boost to the selling prices of steel makers and driven their profit margins and cash flows in the quarter to be reported. U.S. steel companies are likely to have benefited from spread expansion as higher steel selling prices offset increased costs of raw materials, including ferrous scrap.

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